QR National erects lower goalposts at shareholder expense

THE board and management of QR National certainly have a penchant for first-class travel, and at shareholder expense, naturally.

Chairman John Prescott and his crew may be travelling on the wrong track, however, as they appear to be veering around a bend towards a train full of screaming shareholders hurtling towards them.

Last year, as Queenslanders were rebuilding their lives in the wake of the floods, the board of QR had devised a special flood package for its executives.

The floods had cost shareholders $187 million in damage to earnings. Yet directors deemed that chief executive Lance Hockridge and colleagues should be compensated for the floods. Were it not for the floods, they said, the company might have beaten its prospectus profit forecasts by 20 per cent.

So they tossed out the old goalposts and erected a new set, which are so low that you need a shovel to dig them up. This year, they have shifted the goalposts again, placing them at such a depth underground that, in order to fail to amble over the top of these goalposts, earthmoving equipment would be required.

You see, QR has tweaked its accounting policies to increase earnings by $51.5 million. And – also without adjusting for the windfall to executive pay – it has a large share buyback in train that will lift earnings further and render the executive remuneration hurdles, which are based on EPS benchmarks, a joke.

Before QR floated on the sharemarket three years ago, Lance Hockridge enjoyed a base salary of $950,000 and a bonus of $140,000.

At the coming annual meeting, shareholders are being asked to sign off on a package of $6.825 million, a double-digit rise, although the share price was flat.

The company had no comment on Friday on whether Hockridge did a six-times-better job these days. It is thought he did not work one day a week when he was a public servant.

What will have shareholders up in arms, though, will not be the size of Hockridge’s pay but the low hurdles and the shifting of the goalposts.

Besides his rise in fixed pay from $1.7 million to $1.95 million, rise in cash bonus potential from 100 per cent of base to 150 per cent, and the grant of 582,000 zero exercise price options (ZEPOs), there is the fact that Lance’s 333,333 ”retention” shares – which he got in the float – only vest as a result of the accounting switcheroo.

There are three classes of traveller in the world of QR. Plushly ensconced in Le Compartment de Premiere Classe, one can find the board and management.

In Second Class are the institutional shareholders. And finally there are the ordinary shareholders, strewn across the carriages like Third Class passengers on the Kolkata to Mumbai service.

It has been the good fortune of this reporter to have stumbled upon a document that has been doing the rounds of Second Class.

In this advice to institutions, the proxy service Ownership Matters recommends they reject the QR remuneration report, vote against the re-election of Graeme John (who has been on the board’s remuneration committee since listing) and against the grant of equity to Hockridge as the hurdles are too low. Two-thirds of the ZEPOs are ”subject to financial hurdles that do not appear sufficiently demanding”, says the proxy adviser.

The EPS hurdle for options to vest is 7.5 per cent growth – well below analysts’ forecasts. The 12 per cent share buyback will likely lift EPS by another 16.3 per cent.

”The impact of the buyback together with existing initiatives will deliver more than two-thirds of the EPS required for vesting without any other earnings improvement,” says the report.

In other words, the lads from QR could stay at home and watch TV and these little beauties would vest on their lonesome.

Let’s not forget that 9 per cent of QR’s earnings were the result of accounting changes, namely, extending the time frame over which coal locomotives are depreciated and capitalising the costs of renewing the ballast underneath its railway tracks – which had previously been expensed.

Without the $51.5 million in accounting gains, QR would not have met its prospectus forecasts of $578 million in underlying earnings last year.

In its defence, QR has been well managed. Cash flow rose 58 per cent last year, net profit was up 22 per cent. And the accounting changes are entirely reasonable. What is not reasonable is the failure of the board – which sets the pay for the executives – to strip out the effect of this artificial earnings hike on executive pay.

One interesting aspect to this report on QR was the section on the backscratchers of the big-business sector, remuneration consultants.

QR splashed $230,000 on RCs last year: $74,400 with Egan Associates on benchmarking and pay structure advice; $68,200 with KPMG for similar services; $21,600 with Tower Watson for advice on peer group definition; $22,850 with Deloitte for valuation of equity incentives; and $42,500 for ”ad hoc benchmarking” and ”remuneration advice” from Ernst & Young. PwC also got a bit.

Finally, what did Queensland Premier Campbell Newman and the government think of the QR largesse at a time when they were making crippling budget cuts? They still own 28 per cent, enough to control the vote and the pay terms. ”As part of the privatisation process, an undertaking was given to the company by both the then Labor government and the opposition that the government would not exercise its voting rights.”

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